Tag Archives: demographics

PEY: Great Companies, Great Sector Allocations And Solid Yields

Summary PEY offers a dividend yield of 3.39%. The individual company allocations include some relatively heavy concentrations. The sector allocation looks nice, but the volatility on the ETF has been surprising. I like the underlying allocations, but rather than using an ETF that trades the companies I’d prefer a simple “buy and hold” strategy. The PowerShares High Yield Equity Dividend Achievers Portfolio ETF (NYSEARCA: PEY ) has an excellent yield at 3.39% and the sector allocations look great. A heavy allocation to utilities and consumer staples seems like a solid way to build a defensive portfolio, however the volatility of the fund has been surprising. Expenses The expense ratio is a .54%. This is quite a bit too high for my tastes. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: The heaviest weighting by a slight margin was given to the Vector Group (NYSE: VGR ). The stock has an incredibly high 6.7% dividend yield and is in the cigarette business. While I’m not thrilled with the actions of tobacco companies, the dividend is very strong, and their product benefits from being highly addictive. For the investor addicted to reliable income, this is an industry that simply makes great financial sense. I thought it was interesting that the Vector Group received such a heavy weighting when I didn’t see Altria Group (NYSE: MO ) near the top. Digging deeper into the holdings I found that Altria Group was included and currently represents almost 2% of the portfolio. You may also notice a few oil companies in the portfolio. ConocoPhillips (NYSE: COP ) and Chevron (NYSE: CVX ) both get respectable weights and offer investors exposure to the oil industry which seems to be entirely out of favor. When it comes to oil allocations, I’m fine with having them in the ETF or doing them individually. In the case of ETFs with higher expense ratios, I would lean towards just buying the oil companies individually since I see the sector as a simple “buy and hold” area. Market Cap and Style The style demonstrates a fairly heavy focus on value companies with a willingness to allow blended allocations. It should be noted that they do have a fairly notable allocation to both the small-cap and mid-cap areas which I would expect to increase volatility. Sectors This was the chart that I thought provided the best selling point for PEY. They offer investors a significant allocation to utilities and consumer staples. These heavy allocations should result in a portfolio that is capable of being significantly more defensive and able to withstand downturns in the economy. I wanted to check and see if things had played out that way, so I ran a quick regression on PEY with the S&P 500 going back to December of 2004. It turns out that PEY got hammered pretty hard. The worst drawdown during the recession was saw the S&P 500 fall by about 55%, but PEY managed to lose over 72% of the funds value. I don’t believe that the fund is currently as volatile as those numbers would suggest, but I would prefer to see more diversification in the portfolio allocations since running allocations greater than 3% to anything other than a company like Exxon Mobil (NYSE: XOM ) is simply introducing additional price risk. Conclusion The yield is solid and the sector allocations give the fund a definite appeal for investors looking for that steady source of income. During 2008 and 2009 the fund took some pretty harsh beatings, but I wouldn’t expect them to see that kind of loss again. One of the challenges that I believe the fund faces is having the objective to track the price and yield performance of the Nasdaq US Dividend Achievers® 50 Index. The lack of diversification within the index makes creates a challenge for building any diversification into the fund. The individual holdings include several great dividend growth champions, but I don’t see a benefit in creating higher levels of concentration or trading the positions frequently. The underlying companies are the kind where an investor might serve their family well by simply taking physical delivery of the shares and stuffing them in a safe with the door closed for the next 50 years. There are some areas where more frequent trading makes sense, but when it comes to these dividend champions, I don’t see a need to have any frequent changes. If the fund dropped the expense ratio to .05% and indicated that there would be almost 0 trades over the next few decades, I’d be very bullish on the fund because the underlying companies offer investors a solid growing stream of income. In essence, I like the allocations more than the strategy that created them.

SDOG: Great Yields With Reasonable Sector Allocations

Summary SDOG offers an exceptional dividend yield of 3.54%. The expense ratio is a bit too high for my tastes. The sector allocation is solid as either a first allocation or a secondary allocation in the dividend growth portfolio. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs One of the funds that I’m researching is the ALPS Sector Dividend Dogs ETF (NYSEARCA: SDOG ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expenses The expense ratio is a .40%. This is too high for my tastes. Dividend Yield The dividend yield is currently running 3.54%. For the retiree or income focused investor that is looking for strong dividend yields, the yield on this fund is excellent. Holdings I put grabbed the following chart to demonstrate the weight of the top several holdings: (click to enlarge) I would ignore the very top weighting in the chart because I’m not convinced that it is a long term location. It may simply be an artifact of the time when I grabbed the chart. The individual holdings have a ton of great dividend champions. General Electric (NYSE: GE ) has been a disappointment to shareholders over the last several years, but the dividend yield is still very high and it isn’t surprising to see it included in dividend indexes. The next thing that I like to see is the presence of both Altria Group (NYSE: MO ) and Phillip Morris (NYSE: PM ). This portfolio is loading up on the sin stocks. Should we consider GameStop (NYSE: GME ) a sin stock? I think the presence of so many video games may be reducing the productivity of younger people as much as any other single factor in the economy. If we were to go all the way down the bottom of the list we would even see Freeport-McMoRan (NYSE: FCX ) on the list which is a little interesting after they had a massive dividend cut. Of course, the price also fell far enough that the dividend yield came back 1.66%. That isn’t strong, but it does represent the exceptional loss shareholders have endured. Since I’ve got some Freeport-McMoRan in my portfolio, I’m well acquainted with the pain other shareholders have endured. I’m a little surprised they aren’t making their play on BHP Billiton (NYSE: BHP ) or Rio Tinto (NYSE: RIO ) for substantially stronger dividend income if they intend to hold stocks in the mining sector as a source of dividend income. Sectors This is a great sector allocation. They went with a fairly even weighting strategy. Since I like going overweight on consumer staples and utilities, I would see this as being ideal for a secondary dividend ETF allocation in the portfolio once the investor is getting overweight on those sectors. As a secondary dividend ETF this is offering excellent sector diversification to go with the very strong yield. Even consider the fund as a first allocation, the positions are still pretty reasonable. I would prefer to use a lower allocation to the basic materials sector, but perhaps that is just the voice of an investor that has been burned by Freeport-McMoRan. For the investor that believes mining materials will have a price recovery within the next few years, this heavy allocation would be ideal. Volatility The ETF has almost perfectly matched the S&P 500 for volatility since inception. Using returns from July 2012 to the present the annualized volatility for the fund is 12.3% compared to 12.5% for the S&P 500. The max drawdown has been a little higher at 13.6% compared to 11.9%. I wonder how much of that was due to the weight of the materials sector. Conclusion This is a pretty good ETF if investors are able to look past the dividend yield. I find a couple of the choices strange for generating dividend income, but the portfolio works as a whole and the relatively even allocation looks a reasonable choice that makes it easier to slip SDOG into a portfolio that already has some major positions filled.

DEM: Emerging Market Equities With A 4.98% Yield Are Worthy Of A Closer Look

Summary The individual company allocations won’t be familiar, but the sector allocations and country allocations can be analyzed well. The expense ratio is simply too high for my taste. The sector allocation looks fairly aggressive, but I do like the idea of getting telecommunications exposure through an emerging market ETF rather than emphasizing it in domestic equity. Allocations to Brazil and South Africa are offering investors the opportunity to incorporate exposure to South America and Africa into their portfolio. The WisdomTree Emerging Markets Equity Income ETF (NYSEARCA: DEM ) offers great yields and appealing allocations to underrepresented countries and continents. The expense ratio is a pain, but the yield looks fairly nice. Expenses The expense ratio is .63%. This is certainly too high for my taste, and that is unfortunate, because there are some really nice things about this ETF. Dividend Yield The yield is currently running at 4.98%. For an income investor, this sounds like a beautiful way to get some of the emerging market exposure. Holdings I put grabbed the following chart to demonstrate the weight of the fund’s top 10 holdings: (click to enlarge) When looking at the emerging market company allocations, I don’t expect to be very familiar with the companies. Rather than focus heavily on the individual companies, I prefer to look into the sector breakdown and country allocations for the ETFs. Sectors (click to enlarge) The sector allocation here is fairly interesting. It feels like when I’m researching WisdomTree ETFs, I’ve simply come to expect high allocations to the financial sector. I’m not thrilled seeing it, but the positions are establishing a very significant amount of income for investors in this sector, and the weak income on equity investments in foreign markets can be a disincentive for retirees to grab enough foreign equity to optimize their portfolio for risk-adjusted returns. The thing I do like seeing here is the heavy allocation to the energy sector and telecommunications services. I’ve been bearish on domestic telecommunications because the market has become so competitive relative to previous years, but it is still developing in many countries. I like the idea of getting telecommunications exposure and emerging markets exposure at the same time, so that allocation is great. Investors should take note that this fund is fairly low on consumer staples and utilities, which tend to be more resilient to market weakness, so there is the potential of some fairly substantial price movements. If an investor is going to run with this kind of aggressive high yield portfolio, they should be ready to rebalance and raise allocations if the shares are falling as part of a bear market. Country The country allocations are another major area of importance for establishing proper diversification. (click to enlarge) I have to admit, this is a fairly interesting allocation. I’d be a bit concerned that the top countries receive such a heavy allocation, which would make me favor combining this ETF with another one or two to round out the international exposure. In those ETFs, I’d be looking for lower weights on the top three countries here to enhance the diversification. The nice thing is that I’m seeing substantial allocations to South Africa and Brazil, which provides this ETF with exposure to continents that are often marginalized or excluded from international ETFs. South America and Africa are the most common continents for being mysteriously left off of international funds, so I find this allocation fairly attractive for diversification. Conclusion The yield on this ETF is great, but the expense ratio is not. Since the companies represent emerging markets, they will generally be unknown to domestic investors, but the sector allocation and country allocation give us some perspective on how the ETF should be performing. The sector allocations feel fairly aggressive, and investors using this fund may want to control for that by being prepared to rebalance if the share prices take a hard hit. The country allocations are the high point of the portfolio. The countries represented in this portfolio, and the continents they are on, are often excluded or marginalized in other international funds. For this high yield, if the expense ratio was dropped down and the sector allocation was modified to be slightly more defensive, this fund would be very interesting. I should point out that the total returns on the fund left a great deal to be desired over the funds history, but the last 8 years have shown dramatically superior domestic performance than international performance, so investors should take the weak past performance with at least a few grains of salt.